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TheFunded.com is an online community of over 20,000 CEOs, Founders and entrepreneurs to discuss fundraising, rate and review angel investors and venture capitalists, and discuss strategies to grow a startup business. Enjoy the site, and be sure to join us at our Founder Showcase events to meet the community.

Venture capitalists tend to invest around trends in the various investment sectors that they cover, which makes sense from a capital concentration standpoint in a given sector. You may be pitching a business that is not related to the current trends, since the trends change every few months, but it is important to understand them. The partners and associates will be actively researching the trends, so a lot of the questions in a pitch meeting will be influenced by the current trends. Questions that may appear irrelevant to you as an entrepreneur may be influenced by the current sector trends. Be prepared.

As a CEO I make sure I periodically look back at my 'fuck ups' and learn from them. Theres been a few along the way, some small, a couple a little bigger, so I wanted to share one here.

Funding

Raising money took way longer than I expected. The search didn't take too long.. the deal completion tooks months and put enormous strain on our resources. Both financially as we bridged our way to funds and on our time and focus. Raising money is a major distraction from running your day to day business. I estimated 2 months to complete the deal. Its taken almost 5 and stretched us thin as well as pulled my attention away from what I am here for - building the business. I'm lucky, we raised money.. but now I get 80+ hour weeks making up lost ground in business development as well as the backlash of robbing Peter to pay Paul the past couple months.

Lesson: Assume 6 - 9 months to search, obtain and close funding and make sure you have both the financial and human resources to run and grow your business during the deal cycle.

Posted by
MrJames
on 2007-12-10

Aspiring entrepreneurs be warned. Venture capitalists will provide money for your idea, but they often walk away with most of the value, especially if you are not careful. Like an amateur sitting at a table of professionals, the cards are stacked against your success, so be prepared. Know the game.

Here are some anecdotal facts. There are five times as many people working in venture capital as there are CEO's that are funded each year (~16,500 vs ~3,000). The average venture funded CEO is fortunate to make 1/10th to 1/20th the return on exit as the venture capitalists. Just the legal fees on a later stage deal will run $50,000 or more per party involved, and the venture capitalists always flip the bill, directly or indirectly. Who do the lawyers work for again"

No matter how nice, no matter how fair, and no matter how genuine a venture capitalist appears, you are being out-smarted, out-lawyered, and out-maneuvered the second you sit down and ask for money. The first step in winning is to understand their motivations: (1) control, (2) risk, and (3) opportunity, in that order. Let's take a look at all three.

The entirety of a venture investment centers around control, and control takes many forms: control of the board, control of the voting, control of the investment capital, and, most importantly, control of the management. Venture capitalists are "control freaks," and the psychology of control is embedded in nearly every aspect of the deal legal structure. Assume that most financing terms, from Board meeting frequency to protective provisions have some origin in control, and analyze them as such. Ask yourself: in good times and in bad, how do these terms affect my behavior as a CEO" For example, did Google really need to have 14 Board meetings in one year... ever"

Venture capitalists are excellent at managing risk. It is assumed that at most venture investments fail, but approximately one in ten succeed. Following this simplistic logic, a venture capitalist would need to make at least $10 from every $1 invested in a success to recover from the 9 losses. Now, not every deal is a total loss, but a lot are. Complex protections are inevitably put in place. Let's look at a common scenario: a company receives $10 MM for 50% of the stock in a participating preferred with a 2x liquidation preference. The company sells for $25 MM right after the investment. How much does the founding team make" Nothing. The "50%" is legalese.

Venture capitalists are not very good at spotting opportunities, or they might have better odds than 1 in 10. However, they are very good at "managing" opportunities as a result. Here are some examples. Venture capitalists do not say "no" (for risk of losing an opportunity). They postpone meetings until you are achieving success, and they flock around markets with success stories. Ever wonder why a venture capitalist calls you out of the blue asking about your company" It's probably because a competitor is succeeding. Every wonder what "demonstrate traction" actually means" It means a nine figure IPO or liquidity event in your sector. Your dream is just potential, and you will be held on the sidelines until "the time is right" for the venture capitalists to make money.

The irony is that the venture capital behavior is largely a response to other abuses by CEO's. At this point, however, the venture capitalists have gone too far. The opportunities in building a venture funded start-up are gone for the great entrepreneurs. It simply makes more sense to go it alone.

Posted by
Mr. Smith
on 2009-06-26

Getting a meeting with an investor is hard these days, but it can be done. Once in a meeting, here are five strategies to make the meeting go well:

>> STICK TO THE FACTS
Sell your idea on factual information only. Avoid adjectives and superlatives whenever possible. You do not have the best, the most, or the greatest anything. Most investors see 2,500 deals per year. They need basic information to determine interest. Suspect information is a red flag, and it only takes one red flag for an investor to lose interest.

>> KEEP YOUR PITCH SHORT
You should be able to explain your company in 10 slides that take about 20 minutes to present. If you want to succeed, then videotape yourself giving the pitch. Watch the video and write down everything that you want to improve in a list. Repeat this process until you are happy with the results. At the end of your pitch, say: "does anyone have questions that I can help you with?" The shorter your pitch, the more questions that will you have, and more questions are good.

>> ANSWER EVERY QUESTION BRIEFLY
Answer every question with one or two sentences and with as few words as possible. Uncomfortable silence is a tool that you can use to elicit another question. If you do not have or know an answer, say: "I don't recall the answer to that off the top of my head, can I look it up in my files and get back to you through email." Questions are an excellent sign of interest and engagement. When an investor gets into 'question mode,' they usually have a series of 5 to 10 questions that they need answered quickly to evaluate the opportunity. You are doing well in a pitch when the investors are talking.

>> ASK FOR FEEDBACK AND TAKE NOTES
Make sure to leave a few minutes to collect feedback. Ask the investors, 'do you have any recommendations for the business?' Have a pen and paper out, and write down everything that the investors say. It's a common courtesy to take notes, and it is expected. After an investor says something, say 'thank you.' Do not get defensive. Nothing sours a relationship faster than getting into a debate.

>> BE AN EXPERT IN YOUR INDUSTRY
You should read every recent blog post and know about every key development in the primary industry and all related industries to your idea. It is very likely that an investor will have seen and researched a very similar idea within the last 45 days. It is also very likely that this investor will ask you about mundane developments or other companies in the field as a test of your knowledge and to show off their own expertise. When confronted, you say, 'Yes, I was aware of that. Thank you.' This will lead to more questions.

As a closing point, be confident and assured. A common misperception is that a deal can be done in one meeting. It usually can't. So, the goal of any meeting should be (1) to get another meeting and (2) to specify follow-up items.

Posted by
RichieBlueEyes
on 2008-10-14

This is basic advice, applicable to any sales situation and a mistake people often make. If you are meeting a potential client (or investor) first make sure they are interested in your product (your company) and agree to go out again (meet again) and provide more background on yourself (your materials) before trying to to sneak into the bedroom and score (discuss terms). Often times terms come up early, I'd recommend saying "first lets see if we click before talking specifics" and drag it out a bit... a meeting or two .... before talking numbers. This way, you know there is an actual interest, potentially leading to a term sheet before entering any type of negotiation which can cause the whole thing to go sour if there is a disagreement. However, if you already are all over each other, you're more likely to settle the disagreement then storm away unhappy. This holds true for selling anything. First gain interest, then sell. Many people just jump the gun and try to sell before knowing if they customer wants anything and while it can work, it changes the tide of leverage.

Posted by
Mr. Smith
on 2008-04-28

This advice is applicable in most negotiations, but it is particularly important to heed in venture capital: don't accept your first offer.

Venture capitalists are betting that they can pressure you to take the terms that they offer, and there are countless stories told by venture capitalists about how they duped CEOs with below-market valuations, excessive control provisions, and aggressive economic terms. I have heard venture capitalists laugh out loud when mentioning a company name and sat on a call where a VC actually whispered the pre-money valuation that was below $1 MM, referring to it as "unbelievable."

Practically speaking, why would any venture capitalist make you a good offer in the first pass of terms" If anything, they will make the lowest reasonable offer and then aggressively pressure you to take it with only minor changes. The good news is that, once a venture capitalist has decided to invest, you now have the negotiating leverage.

Posted by
sparrow
on 2008-11-20

It's an easy trap to fall into. You've labored on your powerpoint presentation, you got nice graphics into it, you followed Guy's advice http://blog.guykawasaki.com/2005/12/t..., you practiced your pitch, and now you're ready to rock and roll.

You're a little nervous but feeling good. You go in and start your presentation, and you're on slide two, and the VC asks "What's the business model here""
No problem, you're ready for him. "I'll get to it on slide 7, let's go through the product first."

Stop! I know it' s hard to change the flow, but expect to do it. Go ahead and jump to slide 7 and give him 10 seconds to read the slide and then explain the model. 10 seconds should be enough since you don't have that much text on a slide, or you shouldn't and even if you did, it wouldn't matter since most VCs have ADD and won't take more than 10 seconds to read anything. The one exception is anything related to finance. But to get back to my main point (VCs are not the only ones with ADD), focus on what the other side is interested in and answer the questions in the order that they are presented.
Usually, one question will lead to the next and you'll find that you're referring to the presentation as support material rather than guiding the discussion.
So why do you need the powerpoint deck" As I just mentioned, it's support material, but it also helps you make sure you've covered everything. When things slow down in the conversation or when your time is almost up, go back through the presentation, and double check that you haven't missed any critical information.
As part of the conversation you'll hear some criticism or doubt about your product, your direction or something else in the presentation. Your gut reaction is to argue, mine is. They're not getting it. Stop yourself. Instead ask question to help you clarify why their thinking is different than yours. There are several reasons to do this.
1. They don't know your company and probably the space it's in nearly as well as you do. On the other hand, they've been exposed to a lot more companies than you have. You're getting free advice. Listen to it and try to absorb. I've talked to three VCs in the last 4 weeks, and two of them gave me good insight which helps me fine tune my model.
2. If they have this objection other VCs might have it too. Listen, learnd and maybe next time you do a pitch you'll be better prepared to answer this issue, or tackle it in your presentation.
3. Arguing has the potential of making you look defensive and uncooperative. Will they really want to invest in someone with these traits.

Having said that, if they challenge one of the basic assumptions of your plan and you've considered and rejected their arguments, it's perfectly OK to present this. "Yes, we've heard from other people that they thought that the markets can't be any bigger than 250,00 users, but actually a Gartner report in Feb of 2008 shows that there are at least 5,000,000. The reason the market is understimated is that most of these people are in Asia and the web analytics don't count them."
Here you scored a point. You thought of the problem researched it, and can provide supporting data.

In summary, try to reach a good balance of give and take. Talk about your product, show that you're excited about it, but listen. I certainly try to.

Posted by
J
on 2008-09-14

Raising money for early stage companies has become more challenging. Traditional angels are more organized and difficult to reach. Most early stage venture funds have exited the field, and the remaining funds are (1) overwhelmed, (2) extremely focused, (3) incompetent, or (4) incubators.

Within this challenging environment, it is still possible to succeed if you know the "new" rules of the game. Here are some tips to consider with your early stage fundraising.

Structure: Almost all professional North American investments are made into Delaware C corporations. Lawyers greedily sell LLCs to charge you for conversion. If needed at inception of your fundraising, convert to a Delaware C corp structure with 2 to 5 million authorized shares to avoid closing friction.

Geography: Most angel and early stage investors focus on a strict investment region so that they can spend time with portfolio companies. Unless you are SERIOUSLY planning to move, don't bother to pitch a firm more than 100 miles away in the early stage. It's literally a waste of your time and theirs.

Traction: Every early stage investor will want to see traction before they invest, whether that is a prototype, a patent, or a committed team of experts. Gone are the days of funding a dream and a PowerPoint pitch. You alone are going to need to make the initial investment in your idea, committing both time and money to get your idea off the ground.

Relationship: Having a standing relationship with your early stage investors makes a big difference, so start attending regional entrepreneur networking events as soon as you have an idea. Don't wait until your idea is ready for prime time, as this is already too late.

Format: Avoid embarrassment by knowing about round types and raise amounts. A friends and family round is usually a purchase of common to get the company off of the ground, but can also be part of the angel round. Angel investors tend to participate in convertible debt or equity rounds that raise between $100K and $1.5 MM. Venture capitalists lead Series A rounds for $750K to $5 MM in preferred equity, sometimes more. The average Series A round varies widely by sector and geography.

Focus: More and more early stage investors are focusing, and they will rarely invest in competing businesses. This means that you should do your homework before pitching a fund. Just check their portfolio page to get a sense of what they are doing.

Pitfalls: Be very weary of convertible debt from venture funds, since, if that fund does not invest in future rounds, you will be completely unable to raise further capital. Avoid corporate venture firms, as these investors scare off other professional investors, since everyone will ask why the big parent corporation just doesn't buy you.

Posted by
J
on 2008-09-13

Many entrepreneurs send a long introductory email and attach a ton of information when contacting an investor for the first time. There is the infamous multi-paragraph email and the 30+ slide PowerPoint that includes information on the vision, strategy, technology, and financials. Sometimes there is also the executive summary and even a full business plan.

The reality is "less is more." If you can say three words and get to the next meeting, then you have succeeded. Send just enough information on the business in the body of an email to get to the next encounter. Here are some reasons why:

Relationship: Investors want to get to know the people involved as much as they want to know the business details, so most investors want to have a few interactions before making any decision. It's very rare to close a financing in one meeting and even less likely after one email. Your goal should always be to get to the next encounter.

Mistakes: Providing too much information gives ample opportunity for a professional investor to find mistakes in your work. An active investor will see dozens, if not hundreds, of deals in one month, so it's likely that you have less perfect information than they do. Don't be judged too early on by perfectly reasonable mistakes caused by your lack of information.

Trash: Given the large volume of dealflow that professional investors are seeing, professional investors are likely to look at simple deals first, coming back to deals with a lot of clutter and materials later on. If you overload your initial email, it may be either (1) thrown immediately in the trash or (2) dumped on a junior associate "to process."

Confidentiality: Your initial materials, even your initial email itself, will likely end up with a competitor and certainly with another investor. Investor confidentiality is correlated (1) the length and (2) the strength of your relationship with that investor. Even in cases of an excellent relationship that has survived over time, confidential information still manages to leak.

Posted by
Entrepreneer
on 2008-04-14

I had the opportunity to sit in on someone else's pitch to a VC recently, and for the first time got a chance to see a pitch meeting from the investor's point of view. It was illuminating. I turned back to the various pitches I had made in the past, and saw them in a new light. When you're embedded in, and heavily personally devoted to an idea for a long time, it's hard to have any perspective. When you're hearing an idea for the first time, you'll probably see some gaping holes immediately. The entrepreneurs who are trying at the idea are willfully blind to these holes, having spent months (or years) justifying their hopes. There is one hole that I perceive is routinely there, and you'd better be ready to answer this question: "Why you""

As an engineer, I have been routinely approached by people with business ideas, who need an engineering lead to get the idea off the ground. They usually also need a designer (product and visual), and maybe a sales person. Which causes me to ask them, "I have my own ideas, and I can go build them. What the hell do I need you for"" In the end, if you cannot write code, write a detailed product spec, draw graphics, draw up contracts, or raise money, what good are you" We could come up with 5 decent ideas a day, so even at a good consulting rate, that's what, $240 per idea" For something to be investable, you need both the idea and the capacity to execute. If you're a dreamer with an idea and nothing built, please don't talk to VCs. You're wasting everyone's time. Go find an angel investor who will help you put together a demonstration of the idea.

Beyond that, even if you bring a team that's capable of executing, you still face a real problem. You aren't the only person working on this idea. Trust me, if you are the only one working on it, the idea is too early. So if there are other people working on it, why are you likely to be one of the winners" Do you have plenty of contacts in the industry" Do you have a deep personal understanding of the problem space" If you're a male 20-something building a Mom's portal, you gotta ask yourself what the hell you're doing. Remember, for every idea a VC invests in, they probably turned down 99 others. What will make you stand out" How will you answer when they ask, "why you""

As it is becoming harder to raise capital from venture capitalists, existing investors are facing situations where they need to lead new rounds in their own portfolio companies. This presents a big problem for valuations, especially if an investor only has convertible debt. Recently, I've heard a few stories about existing investors promising to lead a round, then pulling out or dramatically changing the terms. Worse, investors will sometimes string you along with a singed term sheet until you are out of cash, and then completely change the deal to take control.

Here are some tips if you think that you are going to need money in the next 18 months.

Know where insiders stand: You need to know where if your insiders will participate or lead a new financing event, and you should also ask them what their specific expectations are for your company performance. Assume that any inside round will be flat.

Pursue other options: Even if your insiders agree to lead a round, you should do your best to have an alternative financing option available. You will never get a fair price for your equity from insiders, since they are pricing, selling, and buying the equity at the same time and since they see all the warts and bruises.

Raise now, not later: Don't wait to raise money. Raising will take twice as long and will be twice as hard in this market. Try to raise enough capital to operate for more than 48 months, if you can.

When in doubt, do debt: If things are not moving fast enough and you have only three or four months worth of cash left, press your existing investors to do a convertible debt round that will give you eight to twelve months of low growth operating capital.

Insider sheet to attract outsiders: If everything else is failing, you may want to have your insiders draft a term sheet with a lot of room for new investors to participate. It's often easier to find outside investors with a "legitimate" term sheet in hand.

Posted by
Bruce Kasanoff
on 2009-01-27

In the middle of trying to launch a start-up (The Goal Mine), the deepening downturn has pulled me back to a practice (Now Possible) that has become more timely than ever: re-positioning companies.

As I look around the entrepreneurial landscape, what surprises me is how little substantive re-positioning has occurred... yet. The world has shifted, dramatically. The rules have changed. And yet most firms are pretty much still pitching the business model they developed before last fall. 95% of the time, that's not going to work.

This new world creates its own opportunities. All is not gloom and doom, unless you fail to acknowledge how much the rules have changed. Rents are going down. Lots of talent is available. People are willing to take chances (largely because they have no choice.) But at the same time, everyone has both hands on their wallet.

One thing to keep in mind: hope is not a strategy. Hoping you'll get funding and find customers even though you did not change your positioning, well, that's not much of strategy. Basically, the entire world is taking a 50% pay cut. So what do you do differently?

By diligently negotiating the cap on investor legal fees, you will dramatically accelerate both the diligence and the closing timeline. Most investors will easily agree to a cap of $25,000 to $50,000, and you can be sure that all of this money (and time) get chewed through on both sides. Factoring in your own legal costs, you could be looking at a $50,000 to $100,000 deal that takes between two and four months to close.

However, negotiate hard when you get a term sheet to cap the investor legal expenses at $10,000. With fees at this level, all of the work needs to go into drafting documents versus negotiating detailed terms. The lawyers themselves will feel pressure to close faster, rather than work endlessly to reach the agreed cap level. All in all, you will be looking at a cleaner deal that closes in two weeks to one month.